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i 



95th Congress 1 
2d Session J 



COMMITTEE PRINT 



Com ihttoe 

l*iu\ i No. 93 7c 



TRANS- ALASKA OIL PIPELINE 
DEPARTMENT OP ENERGY DO 




REPOR 

SUBCOMMITTEE OX OVERSIGH' 
INVESTIGATIONS 

OF THE 

COMMITTEE OX INTERSTATE AND 

FOREIGN COMMERCE 

HOUSE OF REPRESENTATIVES 

NINETY-FIFTH CONGRESS 

SECOND SESSION 




DECEMBER 1978 



36- 



U.S. GOVERNMENT PRINTING OFFICE 
WASHINGTON : 1978 



For sale by the Superintendent of Documents. U.S. Government Printing Office 
Washington, D.C. 20402 






COMMITTEE OX INTERSTATE AND FOREIGN COMMERCI' 



HARLEY O. STAG 
JOHN E. MOSS, California 
JOHN D. DINGELL, Michigan 
PAUL G. ROGERS, Florida 
LIONEL VAN DEERLIN, California 
FRED B. ROONEY, Pennsylvania 
JOHN M. MURPHY, New York 
DAVID E. SATTERFIELD III, Virginia 
BOB ECKHARDT, Texas 
RICHARDSON PREYER, North Carolina 
CHARLES J. CARNEY, Ohio 
JAMES H. SCHEUER, New York 
RICHARD L. OTT1NGER, New York 
HENRY A. WAXMAN, California 
ROBERT (BOB) KRUEGER, Texas 
TIMOTHY E. WIRTH, Colorado 
PHILIP R. SHARP, Indiana 
JAMES J. FLO RIO, New Jersey 
ANTHONY TOBY MOFFETT, Connecticut 
JIM SANTINI, Nevada 
ANDREW MAGUIRE, New Jersey 
MARTY RUSSO, Illinois 
EDWARD J. MARKEY, Massachusetts 
THOMAS A. LUKEN, Ohio 
DOUG WALGREN, Pennsylvania 
BOB GAMMA GE, Texas 
ALBERT GORE, Jr., Tennessee 
BARBARA A. MIKULSKI, Maryland 



GERS, West Virginia, Chairman 

SAMUEL L. DEVINE, Ohio 
JAMES T. BROYHILL, North Carolina 
TIM LEE CARTER, Kentucky 
CLARENCE J. BROWN, Ohio 
JOE SKUBITZ, Kansas 
JAMES M. COLLINS, Texas 
LOUIS FREY, Jr., Florida 
NORMAN F. LENT, New York 
EDWARD R. MADIGAN, Illinois 
CARLOS J. MOORHEAD, California 
MATTHEW J. RINALDO, New Jersey 
W. HENSON MOORE, Louisiana 
DAVE STOCKMAN, Michigan 
MARC L MARKS, Pennsylvania 



W. E. Williamson, Chief Clerk and Staff Director 

Kenneth J. Painter, First Assistant Clerk 

Eleanor A. Dinkins, Assistant Clerk 

William L. Burns, Printing Editor 



Subcommittee on Oversight and Investigations 
JOHN E. MOSS, California, Chairman 



JIM SANTINI, Nevada 
THOMAS A. LUKEN, Ohio 
DOUG WALGREN, Pennsylvania 
ALBERT GORE, Jr., Tennessee 
CHARLES J. CARNEY, Ohio 
HENRY A. WAXMAN, California 
PHILIP R. SHARP, Indiana 
ANTHONY TOBY MOFFETT, Connecticut 
A N D R EW MA QUIRE, N e w Jersey 
ROBERT (BOB) KRUEGER, Texas 



JAMES M. COLLINS, Texas 
NORMAN F. LENT, New Yoik 
MATTHEW J. RINALDO, New Jersey 
DAVE STOCKMAN, Michigan 
MARC L. MARKS. Pennsylvania 
SAMUEL L. DEVINE, Ohio (ex officio) 



HARLEY O. STAGGERS, Wesl Virginia 
(ex officio; 

John R. Galloway, Energy Task Foru Director 

Richard a. Fa lndsen, < ' m \sel 

Pamela R. Morri isette, Stafl Assistant 

Bernard .). Wunder, 'r., M tel 



(ii) 



LETTER OF TRANSMITTAL 



House of Representatives, 
Subcommittee on Oversight and Investigation, 
Committee on Interstate and Foreign Commerce, 

Washington, D.C., December 1078. 
Hon. Harley O. Staggers, 

Chairman, Committee on Interstate and Foreign Commerce, 
Washington, D.C. 

Dear Mr. Chairman: The attached report of the Subcommittee 
on Oversight and Investigations reviews the Department of Energy's 
(DOE) intervention in rate proceedings pending before the Federal 
Energy Regulatory Commission to establish transportation tariffs 
for the Trans-Alaska Pipeline System (TAPS). The report finds that 
DOE's intervention in TAPS, the biggest (in terms of dollars) rate case 
in U.S. history, has been poorly managed and inept. In addition, the 
report concludes that the Department of Energy has not served the 
national interest by effectively dropping out of the TAPS proceeding — 
an action which could undermine future Alaskan oil development and 
efforts to reduce foreign oil imports. 

The report, based on two days of joint public oversight hearings held 
with the Subcommittee on Energy and Power, recommends that Secre- 
tary Schlesinger personally strive to improve management at all 
levels of the Department of Energy. 
Sincerely, 

John E. Moss, 
Chairman, Subcommittee on Oversight and Investigations. 

(in) 



Digitized by the Internet Archive 
in 2013 



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CONTENTS 



Page 

Introduction and summary 1 

Recommendations 5 

Chapter I — Early stages of Department of Energy intervention 7 

Chapter II — Direct testimony — The heart of DOE's TAPS intervention... 11 

Chapter III — Secretary Schlesinger's May 5, 1978, decision 15 

Chapter IV— DOE disappears from the TAPS case 21 

(V) 



Traxs-Alaska Oil Pipeline System: Department of Energy 

Intervention 

introduction and summary 

In 196S, oil was discovered at Prudhoe Bay, Alaska. Shortly 
thereafter, plans were announced for the construction of a Trans 
Alaska Pipeline System (TAPS) to carry this oil from the Alaskan 
North Slope to Valdez, Alaska, for transhipment to the U.S. lower 48 
states. Construction of the pipeline began in 1974, and oil first began 
to flow through TAPS during the summer of 1977. The original cost 
projection for the pipeline was approximately $900 million, but by 
the time TAPS went into operation expenditures totalling ov( r $9 
billion had been made. TAPS thus became the largest regulated energy 
transportation project ever constructed. 

In May and June 1977, seven of the eight owners of TAPS, anticipat- 
ing its completion in mid-1977, filed tariffs with the Interstate Com- 
merce Commission (ICC) setting out the rules and rates governing 
transportation of oil over TAPS. Formal protests contesting the 
reasonableness of the initial tariff rates were immediately filed with 
the ICC by the State of Alaska, the Arctic Slope Regional Corporal ion 
(representing the interests of Inupiat Eskimos), the United States 
Department of Justice, and the ICC's Bureau of Investigations and 
Enforcement. 

The ICC. by its order of July 7, 1977, referred the investigation of 
the lawfulness of the initial rates to an Administrative Law Judge, who 
scheduled consideration of the issues into two phases. The first phase 
of the proceeding was to address, among others, the issues of a "just 
and reasonable" rate of return to the TAPS owners, the most ap- 
propriate rate base on which to apply the rate of return, and the 
appropriate tax treatment for computing a tariff. Phase II will review 
the costs of the pipeline project to determine what costs, if any, should 
not be included in the pipeline rate base because of mismanagement. 

On October 1, 1977, the date the Department of Energy Organi- 
zation Act of 1977 went into effect, jurisdiction over the transporta- 
tion of oil in interstate commerce by pipeline was transferred from the 
Interstate Commerce Commission to the Federal Energy Regulatory 
Commission (FERC). Formal hearings on the TAPS tariffs are 
currently being conducted by the FERC. 

The Congress, recognizing that various rate proceedings can at times 
have a significant impact on national energy policy, permitted the 
Secretary of Energy, under Sec. 405 of the Department of Energy 
Organization Act, to intervene on the record as a matter of right in 
such proceedings. In recognition of the important national energy 
issues attending to TAPS, the Department of Energv intervened in 
the TAPS proceedings before FERC on October 7, 1977. 

(l) 



In opposing the tariff rates filed b} T the eight major oil companies ! 
who own TAPS, DOE took the position that the "national economic 
interest and the national energy policy to reduce reliance on imported 
oil militate in favor of the minimum tariffs [for TAPS] consistent 
with the costs and risks prudently incurred by the pipeline owners." 2 
To obtain minimum tariffs, DOE urged that the "rate of return be 
set as low as possible without being confiscatory." 3 

During the Subcommittee's hearings, Administrator Bardin further 
explained the significance of the TAPS tariffs: 

* * * Now, the higher the tariff, the higher the rate charged for hauling the 
oil through the pipeline to Valdez, the less is left over for the wellhead. There is 
no question if we leave very little at the wellhead we are minimizing the develop- 
ment incentive to come up with more oil on the Alaska North Slope. 

Worse than that, there are eight companies who are coowners of this pipeline 
and they, of course, can take their profits in the transportation function — all 
other things being equal. Most of the eight are also producers. For a producer who 
is a coowner in the pipeline it is competitively advantageous because of that ver- 
tical integration to see his own share developed, but the potential new entrant, 
another company who might come in as an explorer, as a developer, as a producer, 
will be at a competitive disadvantage against the coowners of the pipeline. 

We have an interest in seeing to it that the profits taken in the pipeline func- 
tion, while adequate to reward the risks taken and to justify and sustain the cost 
of that investment, not be excessive. 4 

Finding itself without the expertise and in-house capability to 
address the key issues in the case, such as rate of return, DOE con- 
tracted with the Washington, D.C. consulting firm of J. W. Wilson & 
Associates to provide expert testimony on behalf of DOE. The Wil- 
son & Associates expert testimony, consisting of separate presenta- 
tions by three persons from within the firm, was prepared under the 
supervision of DOE's Economic Regulatory Administration in close 
consultation and coordination with the Office of General Counsel. 

The most controversial aspect of the testimony was the rate of 
return recommendation. By advocating a low rate of return, 8.85 
percent overall, Dr. Wilson's testimony was in keeping with DOE's 
brief and was well below the rates of return, some as high as 20 per- 
cent, sought by the oil company owners of TAPS to support tariffs 
which average $6.21 per barrel. 5 

1 The percentage ownership interests in the pipeline are as follows: Percent 

ARCO 21.00 

Sohio - 33.34 

Exxon 20.00 

Amerada Hess . L 50 

Mobil... o.00 

Phillips 1.66 

Union 1.66 

BP lo.84 

Total .--. 100.00 

Excluding Union, the same seven companies own approximately ( .i."> percent of the Prudhoe Pay pro- 
duction. 

2 Department of Energy Pre-IIearing Brief in Trans-Alaska Pipeline System, FERO Docket No. OR 
78-1 (hereinafter cited as DOE Pre-IIearing Prief); printed at Hearings on Trans-Alaska Oil Pipeline Sys- 
tem: DOE Intervention before the Subcommittee on Oversight and Investigations and die Subcommittee 
on Energy and Power of the Committee on Interstate and Foreign Commerce, House of Representatives, 
951 li ( 'ong., 2nd Sess., Serial No. 95-112, June 26 and 26, 1978 (hereinafter cited as Hearings) at 3 et seq. 

3 Id. at 15. 

* Hearings, 57. 

5 The pipeline owner oil companies have filed for tariffs which range from $6.04 to $6.44 per barrel. Accord- 
ing to workpapers submitted by Wilson & Associates to DOE, an 8.85 Overall rate of return in the context of 
Specified debt/equity and capital structure parameters would result in a TAPS tariff in the neighborhood 
of $4.4') per barrel. The proposed DOE recommendation would have been at the lower end of the spectrum 
when compared to other protestantS such as the Department of Justice, FERC stall or State of Alaska. 



The importance of the TAPS rate of return proceeding bo the owners 
of TAPS and to future Alaskan oil exploration and development is 
suggested by the following example. Assuming the $6.2] tariff pro- 
posed by the TAPS owners to be but 81 cents (or 15 percent; higher 
than that which will be ultimately set by FERC, the resulting savings 
in pipeline transportation costs would increase the wellhead price of 
Alaskan oil by that same 81 cents per barrel in providing an addi- 
tional $324,000,000 per year incentive for the exploration and de- 
velopment of Alaskan oil. 6 Over a twenty yew period that would 
amount to an approximate $6.5 billion. 

The second volume of testimony from the Wilson firm, prepared 
by Mr. George Donkin, provided specific examples of recently dis- 
covered Alaskan North Slope formations containing "signincant 
quantities" of crude oil where incentives to develop and produce could 
be undermined by artincally high tariffs. Mr. Donkin's testimony 
also discusses how, as a result of high TAPS tariffs, "non-owner 
petroleum companies would be placed at a distinct competitive dis- 
advantage, relative to the TAPS owners, in exploration, development 
and producing operations on the Alaskan North Slope." 7 

The high cost of transporting Alaskan oil is already threatening, 
moreover, to prevent the Atlantic Richfield and British Petroleum 
companies from producing between one-half to one billion barrels of 
proved reserves west of Prudhoe Bay. According to company officials 
"the price received for the oil will be crucial" in determining whether 
those known reserves will ever be produced. 8 

The DOE sponsored Wilson testimony was due to be filed with 
FERC by close of business Friday, May 5, 1978. However, in a last 
minute decision, Secretary Schlesinger scrubbed the filing of that 
testimony and seriously undermined the Department's intention to 
push for the lowest legally permissible rate of return in support of 
minimum tariffs for TAPS. Ironically, Secretary Schlesinger has 
acknowledged that the testimony, which had been prepared at public 
expense, was a professionally sound product consistent with the 
Department's policy in the TAPS case. 9 

As a result of the Secretary's decision, DOE became the only major 
party, in the biggest (in terms of dollars) rate case in U.S. history, 
which failed to make a direct evidentiary presentation in support of its 
policy positions concerning the maximization of Alaskan oil produc- 
tion. In so doing DOE seemingly failed, moreover, to honor its statu- 
tory mandates to promote competition and prevent unreasonable 
profits in the various segments of the energy industry. 10 

In the face of mounting criticism of Dr. Schlesinger's action, the 
DOE released Wilson & Associates from their contractual obligations 
to the Department to permit an Eskimo group, the Arctic Slope 
Regional Corporation, to sponsor Wilson's testimony. In so doing, 
the Department of Energy placed the burden of supporting the 
national energy interest in TAPS on a tribe of Eskimos who had 

6 Based on annual pipeline throughput of 400,000,000 barrels. 

7 Prepared Direct Testimony of George L. Donkin, April 1978, at pp. 24 and 25. 
« The Oil Daily, May 2, 1978, printed at Hearings, 26. 

9 Hearings, 48. 

»o Department of Energy Organization Act of 1977, Public Law No. 95-91, 42 USCS 7112(12) (August 4, 
1977); Federal Energy Administration Act of 1974, Public Law No. 93-275, 15 USCS 764(5) (May 7, 1974) 



36-798—78- 



4 

intervened in TAPS for the understandable purpose of advancing its 
own financial interests. 

On June 26 and 27, 1978, the Subcommittee on Oversight and 
Investigations and the Subcommittee on Energy and Power held 
joint public oversight hearings on DOE's intervention in the TAPS 
case. Mindful of the national energy interests involved in TAPS, the 
hearings undertook a case history review of the Department's overall 
performance in TAPS and the decisionmaking process which led to 
Secretary Schlesinger's May 5 decision. DOE's performance in TAPS 
was also thought to be an appropriate yardstick to evaluate the day- 
to-day working relationships and management of key offices within 
the recently consolidated Department of Energy. The Subcommittees 
interest was further enhanced by the National Energy Act legislation 
which contemplates important new responsibilities for DOE's inter- 
vention program. 

Witnesses who appeared before the Subcommittees included Dr. 
James R. Schlesinger, Secretary of Energy, Mr. David Bardin, 
Administrator of the Economic Regulatory Administration, Mr. 
Eric J. Fygi, Acting Deputy General Counsel and members of their 
staffs who were directly responsible for conducting DOE's intervention 
in the TAPS case. 

The primary topic of this report is not the merits of the issues 
presented in the TAPS proceeding per se, issues on which the members 
of the Subcommittee may disagree, but rather the operational effi- 
ciency and effectiveness of the Department, and its intervention 
program, in advancing national energy policies in an important rate 
case and the failure of Secretary Schlesinger to offer an acceptable ex- 
planation for his decision not to submit the proposed Wilson & 
Associates testimony to FERC. 

After extensive investigation and two days of public hearings, the 
Subcommittees conclusions are as follows: 

1. DOE did not serve the national interest by effectively dropping 
out of the TAPS proceeding, an action which could undermine future 
Alaskan oil development and efforts to reduce foreign oil imports. 

2. The DOE intervention in the TAPS proceedings to date has been 
poorly managed, inept and inconsequential. 

3 DOE is woefully lacking in the in-house expertise necessary to 
address the complex issues presented in pipeline ratemaking cases such 
as TAPS. 

4. The Economic Regulatory Administration, particularly in the 
initial stages, failed to provide the Office of General Counsel with the 
policy guidance and technical expertise necessary to adequately 
support the Department's intervention before FERC. 

5. DOE had no established procedures for timely review of policy 
questions and proposed testimony in Federal and State interventions, 
and Administrator Bardin failed to properly manage the TAPS inter- 
vention so that sufficient time was provided for Secretary Schlesinger's 
review of the consultant's testimony. 

6. Secretary Schlesinger was remiss in not establishing Department 
policy on the role of contractor personnel, until substantially after 
ERA had expended public funds to specifically contract for expert 
witness testimony on behalf of DOE in TAPS — a situation which he 
later found objectionable. 



RECOMMENDATIONS 

Unfortunately, it is too late to undo the damage done to DOE's 
intervention by its failure to file direct testimony and to ameliorate 
the concern that Secretary Schlesinger's actions in TAPS were influ- 
enced by an unwillingness to oppose the major oil companies m TAPS. 
In addition, the mismanagement, lack of established procedures and 
policies, and administrative breakdowns which characterized the 
Department's TAPS intervention are seemingly so ingrained and 
reflective of overall DOE chaos and mismanagement as to defy ready 
solution. 

In the first year of the Department's existence, senior level officials, 
including Secretary Schlesinger, were seemingly consumed by the 
struggle to pass the National Energy Plan. With much of this contro- 
versial legislation behind us, it is imperative that Secretary Schlesinger 
not let extraneous activities and presidential missions detract from his 
having to personally strive to improve management at all levels of 
the DOE. 

To its credit, DOE has moved to correct certain of the glaring- 
shortcomings revealed in the intervention program by the TAPS 
experience. On August 10, 1978 Deputy Secretary O'Leary informed 
the Subcommittees that "procedures for handling interventions in 
Federal and State regulatory agency proceedings have been estab- 
lished." 11 In particular, an Intervention Review Committee composed 
of the Assistant Secretary for Policy and Evaluation, the Economic 
Regulatory Administrator, and the General Counsel has been set up 
to select cases for intervention, establish major policy objectives, and 
supervise the overall level of DOE involvement. Lines of responsi- 
bility between the key internal offices of the Department have also 
been made clearer. 



» Letter from Deputy Secretary John F. O'Leary to Chairman John E. Moss, August 10, 1978, printed at 
Hearings, 241 et seq. 



Chapter I — Early Stages of DOE Intervention 

The Administrator of the Economic Regulatory Administration 
(ERA) has been delegated the Secretary's authority to intervene on 
behalf of the Department in proceedings before FERC or other Federal 
and State agencies. 12 Mr. David Bardin, the Administrator, authorized 
DOE's intervention before FERC in the TAPS case on October 7, 
1977. 

Administratively within DOE, the lawyers assigned to the case from 
the Office of General Counsel (OGC) viewed ERA as their client and 
looked to ERA for policy guidance and technical support in carrying 
out DOE's intervention. Unfortunately, during the period from 
October 1977 through mid December 1977, policy guidance, technical 
support, and overall supervision from ERA were virtually nonexistent. 

The confusion within ERA and the breakdown in coordination 
between OGC and ERA was chronicled in a memorandum prepared 
by the staff attorneys which described the situation in October, 1977 
as follows: 

The Office of the General Counsel found itself in the anomalous position of trying 
to articulate a position in a very important proceeding without the benefit of a 
client oi a policy. There ensued during most of the month of October what could, 
without hyperbole, most accurately be described as a game of "bureaucratic ping 
pong" between Doug Robinson's office and Doug Bauer's office 13 within ERA, 
with the attorneys for the Office of General Counsel serving as the ping pong bail. 
During this period of time, Bruce Driver and/or Woody Torrence scheduled nu- 
erous meetings with persons in each of these offices only to be told shortly before, 
shortly after, or at such meetings (when they were not cancelled) that the authority 
with respect to the Trans- Alaska Pipeline matter had been transferred to another 
office. 14 

As late as the first week of December, 1977, the staff attorneys com- 
plained of no departmental policy, no expert witnesses, no paralegal 
assistance and a brief due in a matter of days. In late December, the 
ERA staff was finally able to formulate departmental positions and 
policies which were approved by Mr. Bardin and set forth in DOE's 
pre-hearing brief on December 30, 1977. 

DOE, in the pre-hearing brief, took the position that the "national 
economic interest and the national energy policy to reduce reliance 
on imported oil militate in favor of the minimum tariff (for TAPS) 
consistent with the costs and risks prudently incurred by the pipeline 
owners." 15 The brief went on to note that the manner in which the oil 
revenues are apportioned by the FERC between the wellhead price for 
oil and the TAPS tariff impacts on the consumer, the national economy 
and the nation's oil supplies. 

52 Delegation Order 0204-4, promulgated by the Secretary of the Department of Energy on October 1, 1977. 

1 3 Mr. Robinson is ERA's Assistant Administrator for Regulations and Emergency Planning while Mr. 
Bauer at the time was the Assistant Administrator for the Ottiee of Utility Systems. 

14 Doe Memorandum of December 7, 1977, describing OGC participation in case, printed at Hearings, 129. 
16 DOE Pre-H earing Brief, printed at Hearings, 12. 

(7) 



8 

The relationship between the TAPS tariff and the well-head price 
stems from the fact that Alaskan oil sells in the lower 48 states at the 
world oil price. Stated simply, the price at the wellhead in Alaska thus 
equals the world price minus transportation costs. The more it costs 
to ship a barrel of oil through the 800-mile Trans Alaska Pipeline the 
lower the price at the wellhead. Lower wellhead prices in turn mean less 
incentive for future production and exploration. 

The predictable effects of establishing TAPS tariffs at levels higher 
than the lowest reasonable level were identified in the brief as follows : 

(1) The wellhead value of the oil would be diminished, with the 
result that economic incentives to discover additional reserves 
would be lessened; 

(2) The value of the [Prudhoe Bay] oil reservior would be 
reduced, so that oil production from known reservoirs would be 
restrained ; 

(3) There would be an increase in the nation's dependence on 
imported oil with concomitant balance of payments implications ; 
and 

(4) Competition among the ANS producers would be diminished 
because of the unfair and unreasonable burden of excessive trans- 
portation costs for the non-owner producers. 16 

As to the critical rate of return element, which directly affects the 
TAPS tariff, the pre-trial brief indicated that DOE would urge that 
the "rate of return be set as low as possible without being confisca- 
tory." 17 DOE's approach relied on traditional ratemaking principles 
which suggest that the rate of return be set no higher than that nec- 
essary to attract capital to the enterprise. 18 

With the filing of the pre-hearing brief on December 30, 1977, the 
DOE staff faced the next stage of the proceeding which involved the 
cross-examination of witnesses from the oil company owners of TAPS. 
Following this cross examination, the hearing schedule called for the 
filing of direct testimony by the DOE and other protestants. 

However, serious problems continued to plague DOE's intervention 
effort subsequent to the filing of the pre-hearing brief. Early in the 
proceeding DOE staff recognized that the agency did not have the 
in-house capability to provide the necessary expert witness testimony 
or technical assistance required for a meaningful and effective TAPS 
intervention. To rectify the situation, the ERA staff moved to retain 
the economic consulting firm of J. W. Wilson & Associates. 

The DOE litigation staff looked to the Wilson firm for assistance in 
three principal areas: (1) cross examination of company and intervenor 
witnesses, (2) preparation and presentation of expert testimony on 
behalf of the Department, and (3) for assistance in preparing briefs at 
the close of the hearing. As revealed by the Subcommittee hearings, 
not one of these objectives was fully realized. 

In January 1978 the immediate task facing the attorneys was pre- 
paring for tiie cross examination of some 32 oil company witnesses 
scheduled to begin on February 8, 1978. To obtain funds necessary for 
the consultants to assist DOE counsel in cross examination, Mr. 
Richard Liversidge, the contract program officer, initiated a $9,500 



» Id. iii 13. 
'' Id. ;ii 15. 

'• ii'c v. Hopt Natural das Co.. 320 U.S. 291 (1944); BluefieU Waterworks & Improvement Co. v. Public 
Servict Commietion 262 U.S. 879 (1928). 



contract. Since he realized that the depart mental process of obtaining 
contracts over $10,000 involved months of delay and administrative 
hassle, he opted for the $9,500 contract even though it was insufficient 
to accomplish the task at hand. Liversidge's efforts to facilitate and 
expedite the contract failed in the end, however, because the paper- 
work got lost within DOE for a 3-week period. As a result the $9,500 
contract was not signed until February 8, 1978, the day after cross 
examination began. The allocated amount allowed the consultants to 
assist the DOE trial staff in the cross examination of "only a couple of 
witnesses" and caused Edelman, the chief trial counsel to note that 
"we have had very limited assistance . . . from Wilson and Company, 
in cross examination." 19 

The effectiveness of DOE's TAPS intervention was also undermined 
by ERA's decision not to commit the resources necessary for the 
agency to share in a computerized system set up by the intervenors so 
that trial counsel could obtain timely access to the tens of thousands 
of documents obtained from the oil companies during discovery. DOE's 
attorneys expected to join the computerized retrieval system set up 
and shared by the other intervenors, including the Justice Department 
and FERC staff, but ERA rejected the DOE participation because of 
a lack of resources. The approximate $6,000 cost to DOE was pitifully 
small when compared to the importance of the case and DOE's twelve 
billion dollar budget. The second member of DOE's trial team, Mr. 
Gurwitz, testified that this decision precluded easy and timely access 
to "60 percent of the discovery documents in DOE's possession." 20 

The bifurcated organizational structure of the intervention program 
led to a situation where the lawyers assigned to the case were under the 
administrative supervision of the Deputy General Counsel for Inter- 
ventions, but had to look to their client, ERA, not only for policy 
guidance but also for the resources necessary to carry out peculiarly 
legal activities such as cross examination. In his testimony, Acting 
Deputy General Counsel Driver recounted one episode where OGC 
had been promised four additional slots by ERA to support the ERA 
Intervention Program but after interviewing candidates and being on 
the brink of hiring two attorneys, the promised slots were withdrawn. 21 

Regarding the TAPS intervention, trial counsel testified that the 
resources provided by ERA were inadequate to support the DOE 
position in the case. Edelman in an internal document stated that 
"counsel for DOE has been severely hampered by the lack of resources" 
available to obtain the services of an "expert regulatory economist 
throughout the proceeding." 22 In another document, Edelman com- 
pared the $36,500 DOE had available for expert consultants to the $1.9 
million that one company alone, Atlantic Richfield Company, had 
budgeted or spent on the first phase of the case and concluded that it 
was a ". . . drop in the bucket compared to the monies spent by the 
oil companies on this case and also compared to the responsibility of the 
Department of Energy to advocate the national interest in this 



>» DOE Memorandum from OGC to ERA, printed at Hearings, Appendix, 275. 

20 Hearings, 115. 

21 Hearings, 135. 

22 DOE Memorandum (draft) prepared by Edelman in May 1078, printed a< Hearings Appendix, 306. 

23 DOE Memorandum from OGC to ERA, printed at Hearings Appendix, 27e- 277. 



10 

While the hearing record clearly points to a failure by ERA to 
effectively and adequately support DOE's intervention in TAPS, it 
also reveals that the efforts of the OGC trial team were poorly orga- 
nized. In dividing up the responsibilities of the OGC trial staff, Edel- 
man, the lead counsel, assigned virtually all of the major responsibil- 
ities to the junior attorney, Mr. Haywood Torrence. 24 These duties 
included summarizing the positions of all parties; preparing the neces- 
sary legal memoranda; collecting, collating and reading all prior testi- 
mony of witnesses in the case, and developing positive cross exami- 
nation of all witnesses. To himself, Mr. Edelman reserved such tasks 
as supervising all of the above tasks, maintaining an overview of the 
case, and attempting to insure that the budget was not overspent. 

Understandably, Torrence notified Edelman that he felt his assign- 
ment to prepare, for Edelman's use, cross examination questions for all 
of the 32 witnesses was "unreasonable" and reminded him that "except 
in law school, I have never cross examined anyone, anytime, am^- 
where." 25 A few days later, Torrence quit the TAPS case — a decision 
in part caused by frustration over the lack of policy guidance and 
technical assistance. 26 

Thus as the cross examination of the witnesses for the pipeline 
owners began, the DOE intervention effort found itself inadequately 
supported, ill-prepared and poorly organized. The retention of the 
economic regulatory expert had been delayed because of an administra- 
tive snafu with the contract and the size of the initial contract itself 
was dictated principally by bureaucratic processing requirements 
rather than what was needed to effectively do the job. The DOE liti- 
gation staff did not have timely access to thousands of discovery docu- 
ments because of an ERA decision not to join the computerized sj^stem 
set up by the other intervenors and the attorney who was to prepare 
all of the cross examination quit the case shortly before it began. 

Mr. Edelman, DOE's chief trial counsel, in a January, 1978 memo- 
randum summarized the intervention effort as follows: 

I am therefore reminded in our present posture, where the Department of 
Energy, in a state of disarray and lacking in resources, which is mandated to 
represent the national interest and has intervened in TAPS, of the days in 1939 
when England stood alone, disorganized and virtually unarmed against a powerful 
Germany. It is challenging and exciting to be the "David" rather than the 
"Goliath" in any fray. The Government in this case, rather than being the "big- 
bad guy", is the "David" up against the multi-national Goliaths. We are fighting 
with extremely limited resources the enormous economic strength and capability 
of eight of the largest oil companies in the world. In a certain sense, it is tragic for 
the national interest that we have such limited resources. But at least it returns 
us to the spirit of Valley Forge when our Country was just starting up disorganized 
and with limited resources. The challenge to organize and to obtain the resources 
which will enable us to carry out the Presidential mandate to the Department of 
Energy and to the American people to wage war on the energy problem. While it 
may seem absurd even to contemplate doing this in the present state of our organi- 
zation and resources, nevertheless it has been done before, and it can be done 
again. 2? 

Unfortunately, Mr. Edelman's optimism was not fulfilled. 



• 4 DOE Memorandum of January 12, r.iTH, describing organization of TAPS case, primed ;ii Searings, 72. 
m DOE Memorandum of January -'t>, 1978, discussing work assignment, printed at Hearings Appendix, 264. 
?6 Hearings, 134. 
2 7 DOE Memorandum of January 12, 1978, printed at Hearings, 7f>-76. 



Chapter II — Direct Testimony — The Heart of DOE'S 
TAPS Intervention 

Notwithstanding- the disorder, inadequate resources, and lack of 
technical support which plagued the staff efforts, the Department was 
still hopeful of having a meaningful impact on the TAPS case through 
its submission of direct testimony addressing the key issues of the 
case. Both OGC and ERA staff members stated that the direct 
testimony of Wilson and Associates was going to be the heart of 
DOE's TAPS intervention and was considered much more important 
than the cross examination. Often, cross examination serves only to 
undercut the opposition case while direct testimony is the principal 
means of getting a cohesive statement of and the basis for ones views 
into the evidentiary record, the vital body of facts and expert opinion 
used to support arguments in brief and sustain the agency's ultimate 
decision. 

To this end ERA, in what was described as an "urgent procurement 
action necessary to support ERA's intervention on behalf of DOE in 
TAPS," 28 entered into a contract modification on February 21, 197S 
with the Wilson firm for an additional $27,000. 

The contract justification statement for the selection of the Wilson 
firm contains the following statements: 

In order to be effective in this important intervention, DOE expert-witness 
testimony is required in the complex areas of oil pipeline rate of return, rate base, 
taxation and competition * * * ERA therefore requests that J. W. Wilson and 
Associates be contracted with to prepare and deliver the expert-witness testimony 
in support of DOE's intervention in the TAPS tariff proceeding * * * Absent 
contract support to piepare direct testimony, ERA perceives no alternative to 
finishing out its cross examination of TAPS witnesses and withdrawing DOE 
from the poceeding. 29 

Calling language in the justification statement "procurement lan- 
guage", 30 Administrator Bardin attempted to blunt any criticism of 
Secretary Schlesinger's eleventh hour decision to scrub the testimony 
of DOE's expert witnesses by asserting that the contract was only 
for technical advice and analysis. According to Bardin, expert testi- 
mony by the Wilson firm was a possible option but he "had not crossed 
that bridge" at the time of the contract. 31 

Administrator Bardin's testimony before the Subcommittee is at 
odds, however, with the testimony of his subordinate Air. Liversidge, 
who stated that he had received personal instructions from Bardin 
". . . to develop, or to oversee the development of testimony that 
was tough and fair." 32 Edelman, moreover, recalled a meeting with 
Bardin where the Wilson firm was discussed: 



28 DOE Memorandum of February 1978 describing consultants' contract, printed at Hearings Appendix 
285. 

29 DOE Justification Statement for Selection of J. W. Wilson & Associates, Inc. of February 21, 1978, printed 
at Hearings, 35 et seq. 

30 Hearings, 34. 
3i Hearings, 103. 
32 Hearings, 232. 

(ID 



12 

I do remember specifically a later meeting with Mr. Bardin in maybe January 
or February, at which time we discussed the range of possible issues that John 
Wilson & Associates were going to be testifying on. 33 

Furthermore, on February 14, 1978, DOE's chief trial counsel had 
notified all parties in the TAPS case that the Department would 
be calling three expert witnesses from the Wilson firm in its direct 
case. 34 

Any doubt that the Department sought testimony, as opposed to a 
technical analysis, from the Wilson firm is completely disspelled by 
the contract terms themselves. Broken into two tasks, Task 1 states 
that "the contractor will prepare testimony in the following areas, 
and will deliver the testimony in the proceeding ..." and seriatim 
payments are allocated upon the "delivery of final testimony," the 
"filing of testimony by DOE", and the "completion of oral presenta- 
tion." 35 This contract was approved by Bardin's chief administrative 
officer and had the concurrence of the Deputy Assistant Administrator 
for Utility Systems. Liversidge also testified that Bardin was aware 
of the preparation and signing of the contract with Wilson and that 
the staff was "proceeding with the development of this testimony. " 36 

The testimony of the Wilson firm was developed under the overall 
supervision of the ERA staff in close consultation and coordination 
with the Office of General Counsel. In early April, five weeks before 
the Wilson firm's expert testimony was due at the FERC, I iversidge's 
immediate supervisor, Grey Staples, the Director of the Office of 
Regulatory Interventions, sent Bardin and other DOE offices a 
progress report from Wilson & Associates detailing the testimony that 
the firm was proposing to deliver. 

In sending it to officials of the Office of Policy and Evaluation, 
Office of Special Assistant to the Secretary, Office of General Counsel, 
and the Office of Resource Applications, Staples sought to "assure 
that the views of the various parts of DOE are included in the 
testimony that we will file." 37 

Subsequently, several preliminary drafts of the consultants 
testimony were circulated by the ERA staff to staff members of other 
interested offices who in turn submitted comments on the testimony. 
As a result of this process, the principal intervention staff for TAPS 
had every reason to believe that the Wilson & Associates final testi- 
mony reflected the best corporate intelligence of the Department, 
was the product of careful thought, and represented a r a infestation 
of the policy positions taken by the Department in the pre-hearing 
brief. 

The W T ilson & Associates testimony consisted of three volumes. 
Basing his conclusion on comparable earnings and security market 
studies set out in the initial 51 page presentation, Dr. John A. Wilson 
concluded that a fair rate of return for TAPS should include an 
allowance of 12.5 percent for common equity capital. His overall 

: Sea i ig 

1 DOE em i lum to All Counsel For Respondents of February 14, 1978, printed a1 Hearings Appendix 
293. 

»»D01 .i h J. W.Wilson and Associates, 1 lc. of February 21, 1978, printed al Hea Ings Appendix 

m i [eai i > i 

»' DOE m • lum of A.pril 7, 1978, desc Ibini tes Imony and eliciting comments, printed al Hearings, 



13 

rate of return recommendation was 8.85 percent, a return which he 
concluded would fairly compensate the TAPS owners as well as permit 
the attraction of additional capital for the enterprise. Dr. Carolyn 
Smith, in a 24-page presentation, reviewed the alternative methods of 
rate base valuation and recommended that the rate of return be 
applied to a prudent net original cost rate base. The third volume, 
prepared by Mr. George Donkin, analyzed the undiscovered ANS 
crude oil resource base, the market structure of the ANS petroleum 
industry, and most importantly the anticompetitive nature and pro- 
duction disincentives of artificially high TAPS tariffs. 

On April 25, 1978, or 10 days before it was due to be filed at FER( \ 
one of Secretary Schlesinger's assistants requested ERA to prepare 
an information memorandum for the Secretary setting forth the key 
points in the testimony. This memorandum, which Bardin signed and 
sent on May 3, 1978, was first seen by the Secretary on the afternoon of 
May 5, 1978 — a few hours before the testimony was due to be filed. 

The TAPS case illustrates the absence of, and need for, internal 
administrative procedures to insure an adequate time for Secretarial 
review of an action if required. Bardin, after acknowledging a "distinct 
lack of timeliness" agreed that "the issue should have been for- 
warded to the Secretary's attention sooner." 38 

A separate but somewhat related problem which the TAPS case 
revealed was the lack of any established clearance procedure for the 
testimony itself. The principal staff members working on the TAPS 
intervention were not sure whether the testimony itself had to be 
signed off at the Secretarial level before filing. In previous cases 
involving state interventions Administrator Bardin had been the final 
approving authority. And although this was the first FERC inter- 
vention for the Department, Bardin, and not the Secretary, had been 
the final sign off for the pre-hearing brief which set forth DOE policy 
positions in the case. 

Apparently the need for Secretary Schlesinger's approval of the 
consultants testimony was not addressed or decided until a morning 
meeting on May 5, 1978 when the staff assembled to brief Deputy 
Secretary O'Leary on the testimony. Administrator Bardin had taken 
the position in his May 3 briefing memorandum to the Secretary and 
Deputy Secretary that the 8.85 percent overall rate of return recom- 
mended by Dr. Wilson would "cover TAPS cost of capital, including 
a return on equity sufficient to compensate TAPS owners fairly." 39 
Such a rate of return, according to Bardin, would maximize producer 
competition and production incentives for new North Slope reserves 
by allocating maximum revenue to the wellhead value. Adoption of 
more generous rates of return, Administrator Bardin warned, would 
"generate excess revenues" and result in "windfall capital gains" to 
TAPS owners. 40 

As the discussion at the O'Leary meeting concluded, one of Secre- 
tary Schlesinger's Special Assistants asked that Secretary ochlesinger 
be briefed on the testimony although the intervention staff was in- 
structed to "be prepared to go" [with the testimony]. 41 To alleviate 

38 Hearings, 46. 

39 DOE info ma ion Memorandum from Administrator Bardin to Secretary Schlesinger and Deputy 
Secretary O'Leary of May 3, 1978. printed a1 Hearings, 31 et seq. 

40 Id. 

«' Staff Interview with Jerry L. Pfeffer, Deputy Assistant Administrator of the Office of t lility Systems 
on May 19, 1978. 



14 

some concerns regarding the financial communities possible concern 
over the rate of return recommended by DOE for TAPS, officials 
of the Policy Office and ERA were instructed to modify the letter of 
transmittal to FERC to further emphasize the Department's view 
that TAPS was distinguishable from future capital intensive projects 
that might come before DOE. This was accomplished prior to Secre- 
tary Schlesinger's afternoon meeting. 

The belated decision to buck the consultant's testimony to Secre- 
tary Schlesinger for final approval led to a hurriedly called meeting at 
approximately 1:30 p.m. on May 5, 1978, where the Secretary first 
became aware of the Wilson and Associates testimony. As Chairman 
Dingell correctly observed, Administrator Bardin did not properly 
supervise or manage the conduct of the case so that the testimony 
came up in sufficient time that it could be properly reviewed and the 
Department had no established review procedures. 42 

42 Hearings, 50. 



Chapter III — Secretary Schlesixger's May 5, 1978, Decision 

Three hours before the Wilson & Associates testimony was due 
to be filed at FERO, Secretary Schlesinger concluded the briefing 
by his high level staff with the announcement that the testimony 
would not be filed by DOE. No reasons for his decision were specified 
at the meeting. The reaction of the OGC and ERA staff members, some 
of whom were literally stuffing the testimony into envelopes for 
mailing at the time, was one of total shock and surprise. 

If, as the Subcommittee's hearings revealed, DOE's intervention 
in TAPS was beset and undermined by management failures and 
deficient internal administrative procedures, then Secretary Schle- 
singer's eleventh-hour decision quashing; the Wilson & Associates 
testimony dealt it a crippling blow. As noted by DOE's chief trial 
counsel in the case, from an evidentiary point of view the failure to 
submit direct testimony effectively cut the heart out of the Depart- 
ment's case in TAPS. The ramifications of and reasons behind 
Secretary Schlesinger's decision repudiating the testimony of DOE's 
consultants despite his and Administrator Bardin's acknowledgement 
that it was "a professionally sound job" 43 were thus a key point of the 
hearings. 

One immediate consequence of the May 5 decision was to leave 
DOE as the only major party in the proceedings which did not make a 
direct evidentiary presentation in support of its policy positions. 
Congressman Edward J. Markey read into the record a statement 
by the Artie Slope Regional Corporation, one of the other protestants 
in the case, which described the significance of DOE's failure to file 
testimony as follows: 

The Department of Energy's decision leaves a severe gap in the direct evidence 
to be presented by protestants as no protestant has presented any direct testi- 
mony focusing on the effects of tariffs on the development of resources and the 
particularly anticompetitive effect of high tariffs. 44 

As previously noted, the testimony of Mr. Donkin of the Wilson 
firm was specifically designed to address the competitive implications 
of TAPS rates including the impact of the TAPS tariff rates upon the 
level of untimate recovery of oil and the competitive structure of the 
producing industry on the Alaskan North Slope. 

To "foster and assure competition" and "prevent unreasonable 
profits within the various segments of the energy industry" 45 are 
specific statutory mandates given by Congress to the Department of 
Energy. Notwithstanding these specific legislative mandates, the 
expenditure of thousands of dollars of public funds to hire expert- 
witnesses, several months of internal staff work, the favorable recom- 
mendation of Administrator Bard in, and the importance of the case to 
the future development of Alaskan oil reserves, Secretary Schlesinger 
blocked the filing of testimony designed to articulate DOE's policy 

43 Hearings, 47. 

44 Hearings, 59. 

« Department of Energy Organization Act of 1977, Public Law No. 95-91, 42 USCS 7112(12) (August 4, 
1977); Federal Energy Administration Act of 1974, Public Law No. 93-275, 15 USCS 765(4) (May 7, 1974). 

(15) 



16 

positions in the TAPS case. His reasons, as expressed to the Sub- 
committees, were essentially three. 

Inadequate time for review on the afternoon of May 5 was the first 
reason. The second was his personal belief that private contractors 
should not formulate or present Government policy. His final reason 
centered around the low rate of return recommendation in Dr. Wilson's 
testimony and its impact on the flow of capital for similar future 
projects. 

The overriding reason, according to Secretary Schlesinger, for not 
going ahead with the testimony of Wilson & Associates was primarily 
procedural. Two specific and separate considerations fell under the 
procedural umbrella. 

The first, as previously noted, was the fact that the testimony was 
presented to the Secretary with only a three hour lead time for review 
before it was due to be filed at FERC. Secretary Schlesinger testified 
that "the decision was put to me in terms of are we going to file by 
5 o'clock or are we not?" 46 

The Secretary's refusal in an important case such as TAPS, to 
submit several volumes of testimony without adequate time for review 
is understandable. However time constraints could only have been a 
transitory, and not the real, reason for DOE's failure to submit the 
testimony because the agency had the option of obtaining an extension 
of time from the Administrative Law Judge or filing the testimony 
late. The FERC staff had sought and been granted an extension until 
May 15, 1978 for filing its expert-witness testimony. Indeed, in his 
letter to Secretary Schlesinger on May 26, 1978, Chairman Moss 
pointed out that "absent a showing of real prejudice it is not un- 
common for late filed testimony to be received into evidence" and 
urged that his "personal review of the Wilson & Associates testimony 
be completed expeditiously to assure the Department of Energy of a 
meaningful role in the TAPS proceeding." 47 

The second procedural consideration which played a role in the 
May 5 decision was the Secretary's personal belief that private con- 
tractors should not "formulate or provide the exposition of Govern- 
ment policy." 48 He indicated that he was surprised to learn on May 5 
that "members of the Department had previously been prepared to 
allow independent contractors to testify on behalf of the Government 
and formulate policy." 49 

After initially calling such a situation "reprehensible" he tempered 
his description to "inappropriate." 50 As evidence of corrective measures 
taken, Secretary Schlesinger submitted for the hearing record DOE 
Order 3230.1, a Departmental directive on the role of contractor per- 
sonnel, which he had signed on June 23, 1978, 3 days before the 
Subcommittee hearings. 51 

While Secretary Schlesinger may have had long-standing views and 
2 regarding testimony by contractor personnel 



48 Hearings, 65. 

< T Letter from Chairman John E. Moss to Secretary of Energy James R. Schlesinger of May 26, 1978, 
printed at Hearings, 18 et seq. 

m Bearings, 3<t. 

« Hearings, 40. 

•0 Hearings, 4. r >. 

51 DOE Order 3230.1 on The Role of Contractor Personnel in Policy Development and In Representing 
The ( ; oven i merit dated June 23, 11)78, printed at Hearings, 42 et seq. 

' Hearings, 63. 



17 

on behalf of DOE, these concerns had apparently never beeo made 
known to key departmental officials in toe contracl procurement or 
intervention offices or to Administrator Bardin. As ( Ihairman Dingell 

accurately concluded "* * * either DOE let a contract in defiance of 
policy, or it had no policy." 53 

Rather than the formulation of DOE policy, department officials 
viewed the Wilson & Associates testimony as the articulation of policy 
positions developed and coordinated with several DOE omi 
The basic policy positions had been expressed in the pre-hearing hue!'. 
And as Chairman Moss noted, the acceptance or rejection of the 
consultants proposed testimony is where the policy comes in/' II 
accepted it then becomes the Department of Energy's position and is 
presented as such to FERC. 

In addition to being first expressed some seven months after the 
Department came into existence and after it had already entered 
into and funded a contract calling specifically for consultants testi- 
mony, the Secretary's views as to contractor testimony appear to be 
somewhat unique among governmental agencies. All other major 
protestants, including the FERC staff and the Department of Justice, 
contracted with outside consulting experts to provide rate of return 
testimony on their behalf in the TAPS case. Secretary Schlesinger 
indicated that on May 5, 1978, he was unaware that outside consult- 
ants were testifying on behalf of other government agencies in TAPS 
but admitted that there was precedent for such use of consultants. 56 
Administrator Bardin claimed total surprise when learning at the 
hearing that the FERC staff, supposedly the repository of govern- 
mental expertise in this area, had employed outside consultants to 
testify on its behalf in the TAPS case. 57 And it is noted that even 
after Secretary Schlesinger's May 5 decision, DOE staff members 
apparently failed to see any problem with government agency spon- 
sorship of the Wilson and Associates testimony because they contacted 
the Federal Trade Commission to determine whether it would intervene 
and introduce the testimony in the TAPS case. 

In response to the Subcommittee's request for clarification of DOE 
Order 3230. 1, 58 Deputy Secretary O'Leary notified the Subcommittees 
on August 10, 1978, that, while the "intent of DOE Order 3230.1 is 
to foreclose the formulation or presentation of DOE policy testimony 
by a consultant . . .," contractor personnel testimony "before a 
regulatory body in conjunction with testimony of a DOE policy witness 
will be permitted." 59 Interestingly, the Director of the Office of Inter- 
vention in his April 7 memorandum raised the very option of a DOE 
policy witness when he solicited the views of all offices as to "whether 
testimony by a DOE witness will be needed to establish the policy 
context for the consultants testimony." 60 This option was rejected by 



53 Hearings, 87. 

s* DOE Information Memorandum from Administrator Bardin to Secretary Schlesinger and Deputy 
Secretary O'Leary of May 3, 1978, printed at Hearings, 30. 

« Hearings, 48. 

M Hearings, 45. 

« 7 Hearings, 66. 

58 Letter from Chairman John E. Moss and Chairman John D. Dingell to Secretary James R. Schlesinger 
of July 11, 1978, printed at Hearings, 239. 

5« Letter from Deputy Secretary O'Leary to Chairman John E. Moss of August 10, 1978, printed at Hear- 
ings, 241 et seq. 

6 <> DOE Memorandum of April 7, 1978, describing testimony and eliciting comments, printed at Hearings, 
77. 



18 

Administrator Bardin who testified that "now for better or for worse, 
I did not accept that alternative and did not transmit it to the Secre- 
tary for his consideration." 61 

Thus, the second procedural roadblock, Secretary Schlesinger's 
qualms regarding exposition of DOE policy by a consultant, could 
readily have been overcome by proceeding with the option of a DOE 
policy witness in conjunction with the Wilson and Associates testi- 
mony. Inexplicably, this alternative, first raised in early April, was 
not reconsidered subsequent to May 5, 1978. 

As a secondary reason for his decision to abandon the consultant's 
testimony, Secretary Schlesinger pointed to certain substantive con- 
cerns centered principally around the rate of return testimony of Dr. 
Wilson. The rate of return allowed on the owners investment in TAPS 
is a critical element in determining the transportation tariff and the 
smallest variation makes millions of dollars of difference to the energy 
companies each year. 

The pipeline owner oil companies have filed for tariffs which range 
from $6.04 to $6.44 and have sponsored witnesses in the proceedings 
before FERC who have called for a rate of return as high as 20 percent 
in support of these and higher tariffs. Adoption of Dr. Wilson's testi- 
mony which recommends an 8.85 overall rate of return would result 
in much lower transportation tariffs but make available millions of 
dollars of additional revenues at the wellhead as a production incentive 
to maximize the development and exploration of domestic oil reserves 
on the Alaska North Slope. DOE's pre-hearing brief described the 
nation's energy policy as one which "seeks to maximize the develop- 
ment and production of domestic energy reserves." 62 

We should note the that Subcommittee is not advancing a position 
on the merits of the issues in TAPS or the positions expressed in the 
testimony of any particular witness, including Dr. Wilson. Rather, 
the concern and focus of the Subcommittees inquiry has been with the 
management of the case and the DOE decisionmaking process which 
led to the rejection of consultants testimony prepared under the 
auspices of DOE to support the strategic national energy interests 
involving the future development of Alaskan oil reserves which are 
impacted by the TAPS case. 

Beyond his uncertainty as to Wilson's specific rate of return recom- 
mendations, especially their impact on the flow of capital for similar 
future projects, Secretary Schlesinger's comments at the hearing re- 
vealed a distressing lack of confidence in the judgment of high-level 
departmental officials who were responsible for the TAPS intervention. 

DOE's pre-trial brief stated that it would urge that the "rate of 
return be set as low as possible without being confiscatory." 63 At the 
hearing the Secretary pointed to the recent rate of inflation and 
queried whether Wilson's rate of return "falls under our injunction 
of being nonconfiscatory is certainly unclear under those circum- 
stances." 64 When he was pointedly asked whether Wilson's rate of 
return recommendations were confiscatory he replied: "No, I have no 
way of making that judgment." 65 In contrast, Administrator Bardin 

81 Bearings, 66. 

w DOB Pre-Hearing Brief, printed al Hearings, 14. 

••Id. al 15. 

84 Searings, 62. 

m Bearings, 100. 



19 

testified that he did not believe Wilson's rate of return recommenda- 
tions were confiscatory. Other staff members from OGC and KKA 

concurred with Administrator Bardin's evaluation. 

A second expressed concern of the Secretary relating to Wilson'- rate 
of return recommendation was "whether it would be sufficient to en- 
courage the flow of capital in other similar ventures. ..." M 

Secretary Schlesinger conceded that DOE, in introducing the 
Wilson testimony, could have made clear that the recommended rate 
of return for TAPS, a monopoly oil pipeline from the largest U.S. oil 
pool to a ready market, would not be indicative of DOE's position on 
future projects. Indeed the staff in the four page cover letter which was 
to accompany the testimony was following this very course of action 
so that "investors would not perceive this as some kind of a Depart- 
ment of Energy effort to keep low rates of return for all major energy 
investment opportunities." 67 

In the proposed letter which had been reviewed by Deputy Secretary 
O'Leary, Assistant Secretary Aim and Administrator Bardin, DOE 
listed eight special factors inherent in the TAPS project which it 
believed "demonstrates the extent to which the TAPS project is 
distinguished from other capital intensive projects." The letter con- 
cluded by stating: 

The recommendations by DOE, based upon the specific combination of cir- 
cumstances in the TAPS project, balance the need for fair returns consistent with 
competitive incentives to encourage expanded ANS production and will encourage 
optimal investments in and development of current and future eneigy projects. 68 

According to his testimony before the Subcommittees, Secretary 
Schlesinger did not read, however, the draft cover letter which focused 
on one of his major concerns relative to DOE's sponsorship of the 
Wilson testimony. 69 

In sum, in rejecting the Wilson testimony Secretary Schlesinger 
discounted the judgment and expertise of his staff, including Adminis- 
trator Bardin. He testified that he had "insufficient information at that 
juncture" 70 and questioned whether "we have the necessary expertise 
to make a correct judgment." 71 Significantly, however, no serious 
effort was made by him after May 5, 1978 to obtain further information 
necessary to evaluate or amend the conclusions in Dr. Wilson's 
testimony. 72 

In response to questioning from Congressman Albert Gore, Jr., 
Secretary Schlesinger summed up his decision as follows: 

The decision was made by me on May 5, given the quality of what we had 
around, that we ought not to get involved. A fundamental principle is "Whenever 
one does not know whereof one speaks, one does not speak." 73 

If Secretary Schlesinger is right, it constitutes a most damning in- 
dictment of the Department's operational effectiveness. The Depart- 
ment had been in existence over 8 months and its TAPS intervention 
was of equal duration. A brief had been filed, public funds expended to 
employ expert consultants, and the final testimony reviewed by all 



«6 Hearings, 62. 

67 Hearings, 112. 

«' DOE Draft transmittal letter of May 5, 1978, printed at Hearings, 97 et seq. 

69 Hearings, 100. 

"o Hearings, 62. 

" Hearings, 63. 

72 Mr. Donkin's testimony on the important competition and Alaska North Slope development considera- 
tions was not filed separately although Secretary Schlesinger acknowledged that "that would be a perfectly 
acceptable way to proceed." (Hearings, 69.) 

« Hearings, 76. 



20 

key offices and approved by Administrator Bardin. A failing per- 
formance by the Department in TAPS, the largest rate case in history, 
raises serious questions as to DOE's dedication to the national ob- 
jective of increasing domestic oil production and the Department's 
proficiency in carrying out a program of state utility interventions 
as contemplated by the recently enacted Public Utility Regulatory 
Policies Act. 

On the other hand, Dr. Schlesinger's abandonment of the con- 
sultants testimony after a 45-minute staff meeting appears to have 
been reached in an off-handed and summary fashion. According to 
his testimony, he first became aware of the existence of the consultants 
testimony minutes before the meeting, a situation which precluded 
presumably any reading of the three volumes of testimony. Secretary 
Schlesinger further indicated that, at the time of his decision, the 
pre-trial brief containing DOE's policy positions had not been brought 
to his attention nor was he aware of the supplemental cover letter 
for the testimony which specifically addressed the Secretary's con- 
cern over capital attraction for future projects and concluded that the 
DOE recommendations embodied in the Wilson testimony "will en- 
courage optimal investments in and development of current and future 
energy projects." 7i The effect of Secretary Schlesinger's decision was 
to override the advice of the individual to whom he had delegated 
responsibility for the TAPS intervention, Administrator Bardin, 
who, as noted previously, had warned that adoption of more generous 
rates of return than those recommended by Dr. Wilson would "result 
in windfall capital gains" to the TAPS owners. 75 Administrator Bardin 
had thoroughly reviewed the testimony and had recommended in 
favor of its filing by DOE. 

The Wilson firm's recommendations, if adopted by FERC, could 
force the oil company owners of TAPS to lower their transportation 
charges about 28 percent — a result that would cost the companies 
hundreds of millions of dollars profit annually. 76 It is also true, as noted 
by Congressman Markey, that during the spring and early summer 
of 1978 there were widespread press reports about a series of "sweet- 
eners" being offered or dispensed to the oil industry in return for sup- 
port for the national energy legislation, particularly the natural gas 
compromise and crude oil equalization tax. 77 However Secretary 
Schlesinger vigorously denied that his decision quashing the con- 
sultants testimony was such a "sweetener" designed to garner oil in- 
dustry support for the National Energy Plan. 78 



74 DOE Draft transmittal letter of May . r ), 1978. printed at Hearings, 97 et seq. 

"sDOE Information Memorandum from Administrator Bardin to Secretary Schlesinger and Deputy 
Secretary o'Learv of May :i, i<»78, printed at Hearings, 30 et seq. 

78 Workpapers submitted by Wilson & Associates to DOE indicate that with their recommended capital 
structure and debt /equity ratios an 8.8. r > percent overall rate of return would yield a tariff in the range o, 
$4.4.". per barrel. This contrasts with tariffs of $6.04 to $6.44 per barrel by the TAPS owners. The differentia 1 
when applied to the existing TAPS throughout capacity of 1.2 million barrels per day demonstrates the 
enormous economic consequences of this case not only to the carriers but also to future development of the 
Alaska North Slope. 

77 Hearings, 61. 

" Id. 



Chapter IV — DOE Disappears From the TAPS Case 

The Department of Energy's retreat from active participation in 
the TAPS case, sounded by Secretary Schlesinger's May 5 decision, 
became a full fledged withdrawal in the succeeding weeks. Within 
days, Mr. Gurwitz, the second attorney who had been on the case 
throughout the hearings at FERC, was reassigned outside of the Office 
of General Counsel. He had been on detail from the Office of Admini- 
strative Services to OGC to work on the TAPS case and was notified 
that his detail was up. Shortly thereafter he left DOE to work for 
another federal agency. 

The chief, and now only, trial counsel assigned to TAPS notified 
the Administrative Law Judge by letter of May 9 that the Depart- 
ment of Energy did not intend to put on any witnesses or evidence. 
On May 11, 1978, the testimony of Wilson & Associates was placed 
in the public reading room. Although Secretry Schlesinger testified 
that he instructed ". . . our people to place the testimony in the 
public document room . . . " 79 internal memoranda demonstrate 
that this action was taken only after the Department had received 
press inquiries concerning its failure to file testimony in the TAPS 
case. 80 

Within the Department, the principal intervention staff was left 
uncertain as to whether the Secretary's May 5 decision signaled a 
change in DOE policy for TAPS. On May 26, three weeks after the 
Secretary's decision, OGC was attempting "to get guidance right 
from the top" as to policy positions, extent of future DOE participa- 
tion in TAPS, and tactical concerns including a public response as to 
why DOE declined to file direct testimony in Phase I. 81 

Externally, other protestants in the TAPS case such as the State 
of Alaska and the Artie Slope Regional Corporation expressed their 
interest in seeing that the Wilson & Associates testimony was made 
part of the evidentiary record of the case. The DOE intervention 
staff also continued to believe that it was important to put the con- 
sultants testimony into the evidentiary record. At the same time, the 
staff was reluctant to sever their relationship with the Wilson firm 
and thus divest themselves of much needed assistance and expertise. 
In addition, the contract had specifically allocated $5,400 for assist- 
ance in preparing the post-hearing brief. 

Nonetheless, on June 2, 1978, the Wilson firm received two letters 
from the Department of Energy. The first letter informed Dr. Wilson 
that the testimony "was of high quality and in complete compliance 
with the contract between the Department of Energy and your firm" 82 

79 Hearings, 39. 

80 DOE Memoranda of May 16, 1978 and June 7, 1978, printed at Hearings, 156-157. 

81 Hearings, 238. 

82 Letter from Deputy Secretary O'Leary to Dr. John W. Wilson of June 2, 1978, printed at Hearings, 166. 

(21) 



22 

while the second letter notified him that the contract was being' "ter- 
minated for the convenience of the government." 83 

While the phrase "convenience of the government" may be a term of 
art in such matters, it was an ironic misstatement of fact in the partic- 
ular circumstances of the TAPS case. Acting Deputy General Counsel 
Driver acknowledged that in releasing the Wilson firm to make them 
available to contract with another party on the case, DOE was essen- 
tially cutting off its left arm. 84 The expert assistance of a regulatory 
economist which the staff thought to be vital was no longer available. 
DOE's chief trial counsel, who had previous experience in rate pro- 
ceedings at the state level, testified that this was the first instance 
where he had had a contract for a regulatory economist terminated in 
the middle of a proceeding. 85 

Internal OGC memoranda took the position that considerable 
technical assistance was necessary for DOE to participate in the re- 
mainder of the case in "any meaningful fashion" and suggested that 
absent the assistance of an expert regulatory- economist DOE would 
be better off withdrawing from the proceeding. 86 At the hearing, 
Acting Deputy General Counsel Driver admitted that meaningful 
participation by the Department of Energy in the TAPS case was 
"currently at a standstill." 87 

Subsequent to the hearings, Deputy Secretary O'Leary notified the 
Subcommittees that the "Department has no plans at this time to 
contract with outside experts for further assistance in Phase I of the 
TAPS proceeding." 88 Thus DOE, lacking expert ratemaking econ- 
omists, has found itself unable to effectively participate in the cross 
examination of the protestants witnesses or the rebuttal witnesses of 
the TAPS owners. Indeed, since May 1978, no DOE attorney has 
attended the hearings before FERC. 

Perhaps in an attempt to close ranks with the Secretary's May 5 
decision, Administrator Bardin at the hearings expounded his view 
that the "most important part of the process is an effective, hard- 
hitting brief . . . based on the record as made by all of the parties." 89 
Apparently he is untroubled by the fact that it was under his direc- 
tion and with his concurrence that the ERA staff expended public 
funds to hire outside experts for the specific purpose of presenting testi- 
mony in the case. 

Furthermore, his view was not shared by DOE's chief trial counsel 
in the TAPS case who testified: 

We want to put on, legally speaking, a strong evidentiary case and unless you 
have evidence on the record you can't make a case and that has been the problem 
in ratemaking cases * * * 90 

DOE officials also acknowledged that without direct testimony and 
counsels participation during cross examination, the agency would not 
have any real impact in shaping the evidentiary record before the 
FERC. Thus when it comes to writing the brief, correctly described 



B Letter from Richard X. Slitter (contracting officer) to Dr. John W. Wilson of June 2, WTBj printed at 
Bearings. 142-143. 

m Bearings, 187. 

• l [earings, 159. 

1,8 DOK Draft Memorandum from General Counsel Coleman and Administrator Bardin to Secretary 
Schlesinger of May 26, 1978, printed at Bearings Appendix, 297 et seq. 

w Bearings, 187. 

•• Letter from Deputy Secretary O'Leary to Chairman John E. Moss of August 10, 1978, printed at Bear- 
ings. 241. 

•' Bearings, 88. 

k0 Bearings, 169. 



23 

by Congressman Markey as "rhetoric, not evidence," 91 DOE will 
have to rely on the record made exclusively by other parties. As 
Chairman Dingell noted "you [DOE] will essentially be flowerpicking 
in the prayer that there is a flower of the type which you will enjoy." 92 
And Acting Deputy General Counsel Driver told the Subcommittees 
that the "degree to which that brief can be based on a thorough 
scrutiny of the entirety of the record of the proceeding is in doubt." ,j:i 
Furthermore, in releasing the Wilson firm, the Department will not 
be able to avail itself of its expertise in preparing the final brief, which 
DOE back in February, in justifying the Wilson contract, said was 
essential. 

With the Department out of the picture, the Arctic Slope Regional 
Corporation (Arctic Slope), a relatively minor party with limited 
private interests in the case, came forward to sponsor the Wilson & 
Associates testimony. Arctic Slope, citing a severe gap in the record 
and prior good faith reliance on DOE to present testimony on the 
important competition and Alaskan oil development issues, peti- 
tioned the Administrative Law Judge on June 16, 1978 to permit 
the late filing of the Wilson & Associates testimony. 

Arctic Slope Regional Corporation, one of 13 groups established 
pursuant to the Alaska Native Claims Settlement Act, represents the 
interests of several thousand Inupiat Eskimos, who have a claim to be 
paid 2 percent of the wellhead value of Alaskan crude oil up to a total of 
$500 million as consideration for their surrender of aboriginal land 
claims in the Prudhoe Bay area. The private economic interests of 
the Eskimo group thus favor low TAPS tariffs, a policy which DOE 
had said was in the national energy interest as well. 

However, at the hearing Secretary Schlesinger agreed with the 
sentiments expressed by DOE's chief trial counsel in a February 
memorandum : 

We cannot rely on the other protestants and intervenors to advance the national 
interests with respect to energy policy. The Arctic Slope Regional Corporation is 
certainly not in the case with the purpose of protecting the national interest, hut 
rather the interests of the native Americans who own certain rights with respect 
to the oil being produced. 94 

Nevertheless, the Department's intervention in TAPS has now 
come full circle from its early desire to play a major role in the pro- 
ceeding because the precedents to be set by this first oil pipeline case 
before FERC and because of the impact the TAPS tariff will have on 
consumers, the national economy and the Nation's oil supply. As the 
Subcommittees hearings revealed, the Department is now content to 
play a cameo role in TAPS, the largest rate-making case in the Nation's 
history, by simply filing a brief on its concerns in the matter while 
relying on several thousand Eskimo families to provide evidence, in 
the form of expert testimony relative to those concerns, 95 and allowing 
other parties to shape the evidentiary record upon which the FERC 
must base and sustain its decision. 



91 Hearings, 59. 

92 Hearings, 91. 
m Hearings, 137. 
9 < Hearings, 58. 

9 5 On July 18, 1978, the Administrative Law Judge permitted the filing of the testimony of Dr. Wilson on 
rate of return and Mr. Donkin on the competitive implications of TAPS rates but disallowed as cumulative 
that of Dr. Smith's on the rate base valuation issue. Interestingly, DOE had supported Arctic Slope's motion 
calling the testimonies a "significant contribution" to the record of the case. 

O 



UNIVERSITY OF FLORIDA 

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